Who would have believed it? Your servant, a fervent follower of stocks and their juicy dividends, has ended up giving in to the sirens of stone!
In a few months, I will exchange my 5-room apartment that cost me 2,400 francs per month for a 5.5-room apartment that should cost me around 1,100 to 1,200 francs per month (according to my initial estimates). I could even go below the 1,000 franc mark in a few years if I decide to repay part of my mortgage.
I'm going to choose my mortgage mix in the next few days, but I'm thinking of putting part in 10-year and the other in Libor (soon to be replaced by Saron). Any suggestions on the proportions? More like 50/50? One third - two thirds?
I had been thinking about becoming a homeowner for several years, but I was never really convinced at 100%. I must admit that Jérôme's explanations on his website and in his e-book played an important role in finally deciding me to take this step. Thank you Jérôme for your wise advice!
Mrs. Dividinde also wanted a change and was convinced by my financial arguments as well as by the advantages of this apartment, in particular: possibility for the children to go to school on foot without having to cross the road, clear view, brightness, 2nd bathroom, underground garage, etc.
Did I liquidate my entire stock portfolio in order to acquire this property? No, rest assured, I drew on dormant money (my 2nd and 3rd pillars) for the vast majority of my equity.
We chose a rather simple and modest apartment but very functional and perfectly suited to the Dividinde family's non-luxurious tastes. The correct purchase price allowed us to finance this property with approximately 45% of equity, thus reducing the mortgage charges to a very reasonable level (although increasing our taxes) and avoiding ending up with a 2nd mortgage (more expensive and mandatory to amortize).
So I will soon save more than 1,000 francs per month on my rent. Knowing me, you can imagine what this money will be invested in!
Isn't life beautiful? 🙂
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Excellent dividinde, what good news!!! I am happy for you, for you.
For a few days I was thinking, hey, dividinde hasn't "laid" anything (sorry for the bad pun), for a while now, he must be hatching something (ok I'll stop).
This is a big step towards financial independence and I am very proud if I was able to contribute even a little bit to it. In addition, you took the opportunity to use your 2nd and 3rd pillar, so it's a jackpot.
Not only do you reduce your monthly rental costs, but if, as it seems, you bought at a good price, it's all profit for the future because not only is your money no longer invested in a lost fund, but your investment will increase in value.
Why are you talking about tax increases? Do you mean taxes for taking out your 2nd/3rd pillar? Or do you mean that if you had borrowed more you would pay even less tax?
Because normally you should reduce your tax bill thanks to your loan. And the taxes for 2nd/3rd pillar deduction are "one shot" and would have been deducted anyway during your official retirement.
In short, congratulations again for this big step forward 😉
As you mention at the end of the article, you have just created a printing press to buy shares 😉
Thank you Jérôme, I am very happy with this decision which should indeed further accelerate my journey towards financial independence! I am also proud to have changed my mind, since a few years ago I thought I would never become a homeowner (only turkeys don't change their minds!).
Regarding taxes, I will indeed pay a significant amount once on the withdrawal from the 2nd and 3rd pillar. This is normal and it does not pose a problem for me, since as you say I would have paid these taxes anyway and even much more (I am breaking the progressive nature of the tax).
I was talking about the taxes that I will pay each year and which I think will increase, since the rental value will be added to my income (salary and dividends), making it explode.
On the other hand, since I have voluntarily chosen to take out a rather low mortgage (I bring in approx. 45% of equity), I think that the deduction of mortgage interest and maintenance costs will not compensate for this increase in taxes.
Congratulations! Happy for you 🙂
Some small remarks/thoughts:
1. Not sure that the Libor is still really advantageous in the long term. The last time I looked, with Raiffeisen it was at least 1% of interest. But this week again I was talking with my sister who has just bought an apartment and she was able to lock in her interest rate at 0.9% over 10 years with fribenk.ch, an online bank. If I were you I would look at all that and lock in as long as possible at a very low rate.
2. Why would you want to put 45% of equity when only 20 are needed? You would be better off investing the minimum in your residence and investing the rest in real estate or dividend stocks (in my opinion), that would make you reduce your monthly payments even more.
Good thoughts 😉
A+!
Thanks Sebastien for your comment!
Point 1:
Regarding mortgages, I have not yet decided on the desired mix. What is certain is that I would not like to block everything at 10 years. I would like to have at least a part in Libor or at max 5 years in order to be able to repay a tranche via the 2nd pillar at that time and thus further reduce my mortgage debt.
Point 2:
In my personal situation, I have seen several advantages to going well beyond 20% of equity:
– Reduce my monthly housing costs as much as possible, especially since I am doing it with funds that are blocked anyway (respectively not available to invest in the stock market).
– I want to withdraw my 2nd pillar as capital at all costs and I fear that this will no longer necessarily be possible in 10 or 20 years. A property purchase is a roundabout way of receiving this money as capital.
– I want to be free to stop working 10 to 15 years before the official retirement age, without the bank forcing me to sell my apartment because the mortgage is too high at that time compared to my (passive) income.
– I already have a lot of money invested in the stock market. Investing a large sum directly in real estate allows me to better diversify my investments.
1) This is the right approach, mixing rates with different maturities, one longer than the other. This gives you flexibility and reduces the risk of bad timing (you will tell me that with current rates this risk is not very high, but it still hurts to see the rates drop just after having blocked them).
2) Sebastien and you are both right. With current rates it is better to put the minimum of equity to keep your money invested elsewhere. But on the other hand, thanks to real estate you can, as dividinde mentions, recover your assets confiscated by the LPP, which currently only bring in a miserable 1% (while real estate is at 5%). So no need to think twice...
1) Personally, I have 2 mortgages for my RP blocked at 10 with a 5-year gap, this allows me to know my monthly payments exactly for 5 years, I like this “security”.
2) you are right to want to withdraw your 2nd pillar. But I remain convinced that it is better to put 50% of the 2nd pillar and 50% of liquidity in equity and to invest the rest available in real estate. Real estate yields AT LEAST 15% of the invested capital using the leverage of a mortgage debt, which is still much better than stocks.
The question I asked myself: do I prefer to save 200 or 300.- per month on my RP monthly payments, or do I prefer to invest them at 15% of RCI in another apartment and get back 500.- per month, knowing that this property will be mine until my death and will belong to my descendants afterward… without counting inflation. The answer was obvious to me
If the goal is to buy a second apartment like in your case, then I think it is indeed the right strategy not to exceed 20% of equity. Thanks for these explanations 🙂
The goal is to achieve financial independence… in my case 20 years before retirement age. If my plan goes smoothly it will be good in 5 years (I hope less ;))
I would just like to respond to the question of using your LPP to the maximum to buy your own home or rather resorting to borrowing, given the low rates, and putting in as little equity as possible. The question is not really whether one or the other method is better than the other, ideally you need both. Take advantage of using your LPP, at least in part, for your own apartment, then take out debt on the rest (own apartment or other apartments). Little tip: the LPP assets that you put into your apartment can stay there if you move and re-let this apartment!
I would like to come back to the notion of return on invested capital, addressed by Sébastien. It seems to me that this point deserves to be explored in more depth so as not to mislead certain readers.
I also like real estate and I know a little about it since I manage a PPE and three apartments, two of which I own directly (with the one where I live). I also owned another property, which I sold. I believe that real estate is a must for anyone aspiring to financial independence, especially since it allows, as we have mentioned, 1) to borrow at low cost, 2) to recover the money stolen by the LPP.
That being said, we should not put it on a pedestal either. It is one of the assets available, one of the very good ones even, but certainly not the most efficient in the long term. The return on invested capital, especially if we are talking about 15%, can give a distorted image of reality. Indeed, this notion, as Sébastien rightly pointed out, implies a leverage effect linked to the debt that we contract. We thus compare the profits made via the rents collected, in relation to the equity invested in the property (and not the value of the property). It is a bit like the equivalent of the ROE on the stock market, the limits of which I pointed out in my last article on GM. Given that the equity is only 20%, it is obvious that the return takes the elevator. Nevertheless, the risks do the same and we must not forget that, even if real estate still has this image of foolproof solidity in Switzerland. Not so long ago, in the 90s, it was a different story. And I'm not even talking about subprime mortgages in the US.
If we want to compare the return on stocks to that of real estate, we have to do it for both without leverage (I'm not crazy enough to use leverage on stocks, even if it's also possible). In this case, the return on real estate (rental income - without capital gains) is around 3.5% in the city (with very little risk of having a vacant home) and 5% in the suburbs (because purchase prices are lower, but with more risk of vacancy). The return on stocks (dividends - without capital gains) is historically around 4.3% (S&P 500), even if since the 90s these returns have fallen a little (companies, especially tech companies, prefer to reinvest in their growth). In addition, currently the return on the American market is only 1.9% due to an unusual rise in the market. However, we are not far from real estate yields, even if the market is very high. Furthermore, we can invest in less popular markets, such as Japan, where dividend yields of 3 to 4% are the norm.
Let us also note, and perhaps above all, that the return on shares is increasing (it increases by 10% per year on average), while that of real estate is constant. Shares are therefore much more interesting in the long term, as all studies confirm. A return of 3% today is thus worth almost 8% in ten years, and so on. This phenomenon is all the more true if we do not only talk about return, but about total return (asset capital gain and return), especially since in Switzerland stock market capital gains are not taxed unlike those made in real estate. The total return on the stock market is of the order of 8-10% per year in nominal, 6-8% in real.
Of course, stocks have risks and drawbacks, but so does real estate, perhaps even more so. As with any investment, these must be taken into account. For example:
– mortgage rate increases
– housing that remains vacant for a long period (therefore no income and mortgages to pay)
– tenant turnover (if no management): significant work for the exit report, possibly monitoring renovation work and finding a new tenant, contract, etc.
– slow and complex process for transactions, involving many actors (buyer, seller, bank, notary, land registry, tax authorities)
– fees for acts
– tenant defaults, same problem as with vacant housing, plus all the administrative follow-up (if no management) of reminders, pursuit and eviction of the tenant. Not to mention the costs.
– administrative work, tenant “bobology”, telephones, etc. (if no management)
– management: 5% of costs. Having management does not mean no worries/work. Not all of them are exceptional. There are far too many people in this field….
– defects in the property, major works to be undertaken
– depreciation of the apartment
– taxation (everything is taxed in real estate! rents, capital gains, deeds… a godsend for the State)-
– natural hazards / earthquakes / disasters / fire / water damage: sure to be well insured, not under-insured? what if the tenant can no longer live there? take out insurance for loss of rental income?
The list is long and we could go on. I don't want to scare people, real estate has its good sides too. But it's not the panacea.
Below I have made an example myself to estimate the return on capital invested in real estate. I arrive at a return of 8%, which is consistent with the figures put forward by Stéphane Defferrard, Managing Director of DL Conseils in real estate financing in Bilan (see link below).
To get a complete picture, I made the estimate over a 20-year horizon, with two successive 10-year mortgages. I estimated that rates would rise, which is likely (in the 1950s we had seen similar rates followed by a 20-year increase. The 10-year rates from 3 to 4% are rather cheap from a historical point of view. I also reduced, in the "actual rentals" column, the rentals by a factor of 1.1% corresponding to the average vacancy rate in Vaud + 0.5% of losses/costs for non-payment. I applied this last rate (0.5%) arbitrarily and I think it is certainly underestimated. For the purchase price and the rent I was inspired by a few properties found on the Lausanne market. I thus obtain a gross yield of 3.8%, slightly higher than the norm. I increased future rents when the reference rates allowed it. I assumed that the rate negotiated at the bank was 0.25 points lower than the reference rate. We realize that the net return before tax (compared to the invested capital) is interesting at the beginning, thanks to the good locked rate. It even climbs for 10 years, taking advantage of the increase in rents. On the other hand, during the new rate negotiation, the return collapses by almost half. Note that the owner, after ten years, could wait for the increase in rents to raise his return a little. Or he could be disgusted by the net return of 5% and want to sell. But prices could have fallen sharply because of the increase in rates in recent years. Not only would he sell at a loss, but above all he would lose more than his initial investment! In other words, he would have lost his equity and would have to add more money to repay his bank. Nearly two years of collected rents would go through this simulation… This is the (black) magic of leverage.
Ok, this is just an example. It is possible that the reality is better. But it can also be worse…. So, as always, only one watchword: DIVERSIFY.
See also the Bilan article cited above:
https://www.bilan.ch/immobilier/investir_dans_la_pierre_conseils
Thank you Jerome for all these explanations! When you talk about real estate yields (3.5 to 5% depending on the location), do you make a distinction depending on whether you live in the apartment yourself or if you rent it? It's not very clear to me, especially since the two situations are very different.
Some risks and costs are indeed very different in these two scenarios. I am thinking in particular of: no risk of vacancy if you occupy the property yourself, no risk of non-payment of rent, major deterioration of the apartment, no need to pay a management company to take care of the tenants, etc.
Basically, it seems to me that the risks and returns are so different in the two situations that they are difficult to compare. This is also why I felt ready to become a landlord, but I can't imagine buying apartments to rent them out. I want to become a rentier and not a property manager!
Obviously the situation is very different between buying your own home and buying with a view to renting. As you say, some risks disappear by themselves when you are the one living there! The worries are much less. Concerning the yield when it is your own apartment it is ultimately a bit the same as when you rent it, even if you do not have to pay rent (but your gain is precisely the rent that you no longer have to pay). So the gross yield is from 3.5 to 5% depending on the location. The net yield, taking into account charges, interest depending on the capital invested can go up to 8%. Or even 9% since you do not have management fees.
Who can enlighten me on the following point?
You can repay a mortgage tranche every 5 years by using an early payment from your 3rd pillar. The same goes for your 2nd pillar.
For example, you can take out 2 fixed mortgages at 5 and 10 years and amortize them at maturity with your 3rd pillar. However, you cannot do this, for example, with 2 mortgages at 5 and 8 years.
My question: Is it possible to get around this 5-year restriction by alternating between 2nd and 3rd pillars? For example, take out 3 fixed mortgages at 6, 8 and 10 years and repay them like this:
– after 6 years: via its 3rd pillar
– after 8 years: via its 2nd pillar
– after 10 years: again via its 3rd pillar.
Thank you! 🙂
Correction: in my example it would be 5, 8 and 10 years (and not 6, 8 and 10).
Unfortunately I am unable to answer this question with certainty. However, I would say a priori that you can do it because the 5-year withdrawal rule applies to the organization (pension fund, bank or insurance) from which you withdraw your money to amortize a debt. They have no idea what you have elsewhere. Only the bank issuing your debt could block the amortization but since the duration of the contracts is staggered in your example, they have nothing to say in my opinion.
To be sure you should ask your banker.
Thank you Jerome for your answer. I will ask the banker's opinion again at my next appointment for confirmation.
After obtaining information from my bank, I confirm Jérôme's response.
For example, it is possible to amortize a mortgage tranche via the 2nd pillar after 5 years and another via the 3rd pillar after 6 years.
In addition, it is permitted to amortize one tranche via a 3rd pillar account with bank X and another tranche, for example 1 or 2 years later via a 3rd pillar account with bank Y.
Finally, something I didn't know (but probably already known to you), when a mortgage tranche matures, you can choose to repay only part of it at that time (I thought that a tranche that has matured had to either be repaid in full or extended again).
Hello everyone, with a view to becoming the owner of a property, I saw that we can pledge our securities portfolio by taking out a "Lombard loan". Has anyone already used this type of loan? Is it an interesting option given the current rates? I would be happy to read your experiences and comments on this subject. Thank you
Sorry AGU, no experience with Lombard loans. But why not just take advantage of this purchase to pump into your 2nd pillar without having to wait until retirement age? In any case, it seems to me a thousand times more interesting than pawning your stock portfolio.
I used Lombard credit a long time ago, but it was to buy other securities. This remains a questionable approach because it is subject to margin calls if the assets put up as collateral depreciate, which can easily happen with shares.
I didn't know that you could do this for real estate and it even seems a bit strange to me as an approach (putting fairly volatile assets as collateral to buy a less volatile property).
As a dividend, the 2nd pillar solution seems to me to be much more interesting, from all points of view. You win on all counts (apart from tax – but you would switch to that later anyway).
The use of the 2nd pillar is of course planned. I was thinking that if I could have a little more while keeping my portfolio and its returns and afford a slightly larger, better placed or more recent property, it could be worth it… Thanks all the same for your quick answers 🙂
You can also use your 3rd pillar if you have one.
An interesting article on the proposed removal of rental value:
https://www.ubs.com/ch/fr/private/mortgages/information/magazine/2021/abolition-of-imputed-rental-value-what-happens-next.html
If this goes through, it will push us to pay off our debts!
Clearly! I am really in favor of removing this rental value which is a stupid Swiss aberration. If it passes, I will rush to pump again into my 2nd pillar to pay off my mortgage!
I agree with you. I never understood the point of this story. It is an economic aberration, which pushes people to never repay their debts (no wonder this peculiarity exists in Switzerland – with the banking lobby). The only thing that makes sense is the possibility of deducting repair work, but if the rental value falls, I am happy to accept it).